FOMC Meeting Notes Recap
FOMC Meeting Notes Recap
Peak inflation for Europe a positive tailwind for the time being
💡 The odds for the market to rally and squeeze towards SPX 4300 has increased, read further on why—especially the FOMC meeting notes analysis below.
Tactically bullish Q1 2023, bearish come Q3 2023 once “sufficiently restrictive” levels start to make its way through the economy.
Today
Jolts jobs report today wasn’t abnormally strong or weak but was a continuation from the previous. So the market sold off then recovered and “priced” that in along with the FOMC minutes.
A lot will now depend on Thurs and Fri job reports, but I think they will likely also come in-line. The market will probably just continue higher towards 4,000 to front run a better than expected Dec CPI report coming out on Jan 12th.
SPY and QQQ closed above max pain + gamma exposure continues higher into more positive territory (GEX was $731M today vs $114M yesterday).
NYSE New 52-Week Highs: 66 vs New 52-Week Lows: 19
NASDAQ New 52-Week Highs: 113 vs New 52-Week Lows: 60
IMO, this is confirmation the market has reversed and I exited all my short positions. I went long companies like PYPL 0.00%↑ , SQ 0.00%↑ , GRAB 0.00%↑ , NCLH 0.00%↑ , DAL 0.00%↑ , DQ 0.00%↑ , GM 0.00%↑ , TMUS 0.00%↑ , XLF 0.00%↑ , and TLT 0.00%↑ . Financials and TLT were positions I was already long when I mentioned it few posts ago and I continue to add to them. Look at price action with BA 0.00%↑ , CCL 0.00%↑ , etc. Very constructive bullish flows to many sectors in the market.
The Jolts job report and FOMC minutes are now “priced in” for the market, it is now waiting to see how “bad” the Thurs and Fri jobs and unemployment reports will be. I say they will likely be mostly in-line as the Fed hasn’t gotten to sufficiently restrictive yet.
HYG daily chart has been bullish the past 4 days and seeing higher lows and higher highs in an upward trend channel
The Risk: if jobs report comes in too strong the market will risk off (my stop loss and signal to hedge again is if SPX 3750 breaks down). Thurs drops QT and I’d have to wait to see how the market responds before adding more risk.
However, what if the consumer spending and the economy is stronger than expected and can handle higher rates? We aren’t at the Fed’s sufficiently restrictive levels yet. And the earnings recession comes later so for now, the market will march higher (I forecasted that by Q3 2023 is when the earnings recession materializes). Companies, especially services and financials will reap the cash flow and income generated from a “healthy” strong economy (for now) still producing jobs and income.
I think financials will become the new market leading sector as the Dow and industrial sector takes a breather. Financials could be a huge winner as many companies are taking out bonds to weather this upcoming recession and so on and these banks are going to benefit immensely.
Here’s my thoughts and why XLF 0.00%↑ is my largest swing trade:
Citi offered me 4% CD—banks are going to make a ton of money just for having money. Think about it, rates are higher now and you can just make money by having money and who has all the cash and deposits? Banks.
Apple also has a lot of cash and they are one of the best companies at generating huge cash flows and managing their capital, so Apple bears might in for a surprise if Apple doesn’t break down and just holds up the market. Also the re-occurring services revenue will become a larger part of Apple’s future cash flows to offset any weakening demand in iPhones (Apple increased prices recently as well). Macs are selling better than PCs as the PC market slows and iPads to AirPods to Apple Watches are ALL outselling their competitors. Apple has more than 1.8 BILLION active devices worldwide (as of Jan 2022), so Jan 2023 earnings could reveal 1.9 BILLION or even 2.0 BILLION active devices. Imagine the future cash flow growth of Apple’s services revenue? If Apple doesn’t fall, the market will not fall as much—it is the quintessential American company.
Apple raised prices 10-40% on specific subscription plans. The largest increase % increase was on Apple TV+ which has grown in popularity. This is a potential threat to Netflix and Disney+ over a longer time horizon. The economy is strong with jobs and company results still doing relatively well (look at T-mobile, to Caterpillar, to Home Construction, etc. better than expected results)
We actually might not see a bad recession just quite yet because the jobs market is still strong—we cannot get a severe recession if jobs are still strong.
As I have shared in prior post about the Fed, if what they are doing is working, and they somehow navigate a softish-landing, I would buy the 2023 dip and go long.
Inflation in Europe has peaked, this is good news
Although it’s been a bear market with many companies seeing their valuations drop, capital has been rotating to other sectors. The close-minded “only buy growth stocks” dudes are the ones getting killed (and continue to fight the market).
FOMC Meeting Recap Notes (link)
In other market developments, the manager pro tem noted the failure of a prominent crypto-asset exchange. While the spillovers from this situation had been significant among other crypto lenders and exchanges, the collapse was not seen as posing broader market risks to the financial system.
Crypto implosion is not a risk to the financial system—so any dips from more crypto FUD in the future could be buyable dips.
Regarding the outlook for monetary policy, both market- and Desk survey-based measures indicated expectations for the Committee to maintain elevated policy rates through 2023. The manager pro tem turned next to a discussion of operations and money markets and assessed that balance sheet runoff was proceeding smoothly.
In recent months, banks continued to increase their use of wholesale funding. In addition, survey information suggested that banks expected to move deposit rates modestly higher relative to the target range in coming months.
Credit continued to be generally available to businesses and households, but high borrowing costs appeared to weigh on financing volumes in many markets. Issuance of investment-grade corporate bonds rebounded somewhat in late October and November from earlier subdued levels, while speculative-grade issuance remained soft. New launches of leveraged loans picked up in November, particularly for higher-rated firms.
The number of home purchases and refinance mortgage rate locks edged lower at subdued levels despite recent declines in mortgage interest rates. In contrast, home equity lines of credit (HELOCs) grew notably in recent months, on net, potentially reflecting homeowners using HELOCs as a preferred way of extracting home equity in the presence of high mortgage rates. Consumer credit remained available for most consumers through September, with auto loans and credit card debt growing at a robust pace. Bank credit data also indicate that the expansion in credit card balances continued in October before slowing in early November.
QT is going smoothly and banks are stepping in. Banks are going to make a lot of money from the Fed’s higher for longer policy. Financials normally rally before recession materializes as people and companies take on too much credit risk (so banks will make lots of money until waves of defaults come as job losses mount).
This is why I’m tactically bullish financials now but bearish later. The banks are extremely well capitalized and ready to support the economy and lend to make tons of money from higher interest rates.
Read this excerpt below—financials sound pretty in good shape for the time being 👇
Credit quality excerpt
Average hourly earnings rose 5.1 percent over the 12 months ending in November, close to the pace recorded in the employment cost index of hourly compensation in the private sector over the 12 months ending in September.
The ECI or employment cost index will be a key report to look closer at for Fed Policy
The forecast for U.S. economic activity prepared by the staff for the December FOMC meeting was not as weak as the November projection. Recent data suggested that real GDP growth in the second half of 2022 was stronger than previously expected, but economic growth was still forecast to slow markedly in 2023 from its second-half pace.
Like the recent upward revision to the Atlanta GDPNow forecast, the economy is MUCH more resilient than anyone thought. What does this mean? Banks will benefit tremendously in this higher interest rate for longer environment. There so far doesn’t seem like any credit risk is around the corner just yet.
With inflation still elevated, the staff continued to view the risks to the inflation projection as skewed to the upside. Moreover, the sluggish growth in real private domestic spending expected over the next year, a subdued global economic outlook, and persistently tight financial conditions were seen as tilting the risks to the downside around the baseline projection for real economic activity, and the staff still viewed the possibility of a recession sometime over the next year as a plausible alternative to the baseline.
The permabears will quote this section and yes, it’s bearish because the Fed is acknowledging the possibility of a recession sometime in 2023 as plausible. Then add inflation risks are still skewed to the upside. This is my bearish thesis that is likely to play out later by Q3 2023—inflation is sticky in services and core while we see a deeper than expected recession. But for this Q1 of 2023, I think flip bullish in the meantime until worst data tells us otherwise.
Participants remarked that, although real GDP appeared to have rebounded moderately in the second half of 2022 after declining somewhat in the first half, economic activity appeared likely to expand in 2023 at a pace well below its trend growth rate. With inflation remaining unacceptably high, participants expected that a sustained period of below-trend real GDP growth would be needed to bring aggregate supply and aggregate demand into better balance and thereby reduce inflationary pressures.
This is quite bearish, the Fed is declaring a huge fight against the market and pushing for below-trend growth because inflation is just unacceptably high (due to such a strong economy).
So the next FOMC meeting is yet another risk off event—so the market could just march higher towards another FOMC meeting again.
Labor market excerpt
Participants generally noted that the uncertainty associated with their economic outlooks was high and that the risks to the inflation outlook remained tilted to the upside. Participants cited the possibility that price pressures could prove to be more persistent than anticipated, due to, for example, the labor market staying tight for longer than anticipated.
Members also concurred that job gains had been robust in recent months, and the unemployment rate had remained low.
This is why the jobs report will be the most important economic report in 2023.
Participants concurred that the Committee had made significant progress over the past year in moving toward a sufficiently restrictive stance of monetary policy.
The permabulls will take this and say this is the huge statement because the FOMC is basically saying we are getting closer to sufficiently restrictive monetary policy—this means a pause is coming where the Fed stops hiking further. However, it’s in reference to why the FOMC decided on 50 bps in Dec. 😅
Participants generally noted that the Committee's future decisions regarding policy would continue to be informed by the incoming data and their implications for the outlook for economic activity and inflation, and that the Committee would continue to make decisions meeting by meeting.
Any references to “data dependent” is usually seen as dovish Fedspeak.
My thoughts on FOMC minutes
Fed is taking a more balanced approach but it’s still overall more hawkish than dovish. There are hints of both bullish and bearish leaning statements but one thing is very clear—the labor market is too strong and presents an upside risk to inflation. The economy is strong, credit quality is healthy, and the Fed may have to do more to get aggregate demand back in-line with supply—especially labor.
Jobs jobs jobs will be the key to 2023. The Fed may have to go higher on rates to get unemployment up so a strong labor market doesn’t keep inflation elevated and prolong a return to the Fed’s 2% target.
Insightful Tweets
T-Mobile is doing well! TMUS 0.00%↑ Also, Verizon VZ 0.00%↑ and AT&T T 0.00%↑ saw more inflows as well. As this becomes more a stock pickers market, companies who are outperforming will be rewarded as evidence in T-Mobile’s stock price vs Verizon and AT&T’s.
Whoa, this isn’t good news about Amazon AMZN 0.00%↑
Amazon continues to layoff even more workers than planned, is something going on at Amazon or is sales really dropping that much? If AMZN 0.00%↑ earnings shows a big drop in AWS, all those richly valued cloud stocks are going to get KILLED.
Great tweet thread that showcases why you need to really know what you own
Rally Jan then downside come Feb?
Ouch for commercial real estate people
*This is not investment advice—I am not a financial advisor but a random person on the internet who does not have a license in finance or securities. This is my personal Substack which consists of opinions and/or general information. I may or may not have positions in any of the stocks mentioned. Don’t listen to anyone online without evaluating and understanding the risks involved and understand that you are responsible for making your own investment decisions.
Hi Jeff! I was wondering if you have a view on where the USD is going this year or in the near future, say, Q1 and Q2? I am quite tempted to add some short-term US treasuries, but it's not my base currency, so I have to assess currency devaluation before adding positions that yield 4% per annum at best.
I suppose a stubborn labor market could lead them to over-hike or maintain a hawkish stance, but then, getting what they're after should favor that move into bonds that will make your long bond trade really shine. Thanks!
Yes, that BOJ interest rate ceiling expansion got me a bit jittery on whether the dollar can handle both a policy change by Kuroda (or his successor) and the ECB hawkish stance materializing into higher rates. That would pressure the dixie lower. Q4 saw a pretty sharp drop too... I think sideways is somewhat consensual.
I am also *very* interested in TLT. In fact, I might just open a small position here since I have none – that was a decent correction from 110, even if we go lower. The technicals are still clearly bearish, but at at these levels and given the multi-year deviation, it's a good hold for the right time horizon. Also, as you said, the bottom could potentially be in given recession expectations.
A bit random: have you looked at Mexican bonds? Strong currency, massive yield. It might be worth the risk/reward with low default risk.